British Columbians make long commitments to mortgages

A friend of mine, Tim Sullivan, sent me the following and I
thought it may be of interest. Some issues raised here warrant further
discussion and I would be happy to discuss with any of you who are
interested. (Taken from The Vancouver Sun Saturday, January 5, 2008 )

British
Columbians make long commitments to mortgages

When
talking mortgages, 40 is the new 25. Less than two years ago, the longest
amortization period for mortgages was 25 years. And that's what most first-time
buyers in British Columbia were opting for, as skyrocketing real estate prices
translated into hefty monthly payments, even when spread over 25 years.

Then
as house prices continued to climb, banks and other lenders stretched
amortization periods first to 30 years, and then to 40 years, softening the
monthly blow of home ownership. Today, the 40-year mortgage is now the norm
among first-time buyers and common among other buyers as well. And with British
Columbians anxious to own homes, B.C. has become the most mortgage-laden
province in the country.

Feisal
Panjwani, a senior mortgage consultant with Invis in Cloverdale, estimates that
95 per cent of his first-time clients are going long-term with 40. There are
also zero-down mortgages and an interest-only mortgage that help them get into
the market, he said.

Panjwani
likes the 40-year mortgage because it allows flexibility with a safety net. If
borrowers can afford to top up the payments they can, but if something happens
and they can only make the minimum payment, that's okay, too.

But
without extra payments, not much equity builds up in the early days. For
example, for a $300,000 mortgage at six per cent, less than $11,000 is paid off
in the first five years of a 40-year mortgage, compared to more than $30,000
for the shorter 25-year mortgage. And part of the money owing on the longer
option will go toward increased insurance costs which rise from 2.75 per cent
for a 25-year mortgage with five per cent down to 3.35 per cent for a similar
40-year mortgage, Panjwani said.

But
the monthly payments of $1,635 compared to $1,919 make the 40-year option the
only affordable choice for many first-timers.

With
B.C.'s high prices, more British Columbians than other Canadians are taking out
40-year mortgages, said Kevin Lutz, RBC Royal Bank's regional sales manager,
mortgages. British Columbians also take on more high-ratio or low down payment
mortgages than the rest of the country.

The
federal government's Home Buyers' Plan offers no relief. Despite the fact that
house prices in B.C. have doubled in the past five years, the plan still only
allows a first-time buyer to take a maximum of $20,000 out of his registered
retirement savings plan.

So
as prices in the province rise, and buyers rise to the bait, what is really
going up is the amount of mortgage debt British Columbians carry.

According
to statistics released by the Bank of Canada, British Columbians carry 19 per
cent of the country's mortgage debt, yet represent only 13 per cent of the
population and 13 per cent of the country's disposable income, Doug Porter,
deputy chief economist with BMO Capital Markets said in an interview.

"When
people talk about the potential risk of outsized household debt it's probably
most acute in B.C.," Porter said.

And
if problems arise in the housing market as they have in the United States, the
large mortgages could be a problem, he said.

But
Porter believes the economy in B.C. should remain strong and that B.C. is not
headed "for a U.S.-style reversal of fortune."

But
the only people who have benefited from the increase in amortization periods
are pre-existing home owners who saw their house prices bump up as a result, he
said.

It
could spell trouble, however, if banks stopped offering the new mortgage
options, said Andrey Pavlov, an associate professor of finance at Simon Fraser
University. Because just as the new mortgages pushed up prices, no longer
offering them would cause a drop in prices, Pavlov said. And that's essentially
what's happening in the U.S.

On
an individual basis, Pavlov said, it's not necessarily a poor decision if
someone buys a house they couldn't afford with a conventional mortgage.

"All
it says is that person is willing to forego a lot of other consumption to live
in that house."
Margaret Johnson, president of Solutions Credit Counselling Service Inc. in
Surrey, worries that some first time buyers can't really afford to buy a house,
even if lenders say they can.

So
while they may get parents to ante up the down payment, the monthly slog may
prove to be too much especially when things go wrong and need fixing, Johnson
said.

Forty-year
mortgages are allowing people to get into the housing market "but I don't
know how long it's going to allow them to remain in the housing market if
anything happens," Johnson said.